MBA, SESSION 1

MANAGERIAL ECONOMICS
DR. SUBHENDU DUTTA

O T
N E
O
D A R
SUBHENDU DUTTA
H
COURSE DESCRIPTION  This course will enable you to learn the basic economic concepts applicable in
business decision making
 The key concepts that a student learn by the end of this course are- scarcity and
its significance, basic economic problems , demand and supply of products,
how prices and quantity of products are determined and what happens when

T
government interferes in the market; how consumers behave in the market and
how their behaviour influences product design and other decisions of firms,

O
how firms are confronted with different costs of production and how to identify
the combination of inputs that can be used at minimum cost, production

N Etechniques and how to gain from economies of scale; and how pricing and other
strategies are followed in different forms of market.

O R
 The course concludes by exposing the students to various types of externalities

D A
and reasons for market failure, and the need for regulations in the economy.

SUBHENDU DUTTA
H
COURSE OBJECTIVES

At the end of the course, students are expected:

 To demonstrate managerial skills and competencies required to take business
decisions

O T
 To demonstrate problem solving ability to improve the performance of a firm
and understand microeconomic environment

N E
 To analyze and predict the behavior of competitors to take strategic decisions

 To demonstrate leadership skills

O
D A R
SUBHENDU DUTTA
H
COURSE READINGS
Recommended Text Book:
 Managerial Economics (Latest Edition): Principles and World Wide Applications,
D. Salvatore; Indian adapted version of Siddhartha K. Rastogi, 8 th Edition, Oxford
University Press.


O T
Suggested books:
Economics (2010): Paul A Samuelson and William D Nordhaus (Indian Adaptation

N Eby Sudip Chaudhuri and Anindya Sen) 19 th edition, McGraw Hill Education (India)
Private Limited, New Delhi

O R
 Microeconomics: Robert S. Pindyck, D Rubinfeld & PL Mehta, 7th Edition,

D A
Pearson Prentice Hall, New Delhi

SUBHENDU DUTTA
H
EVALUATION COMPONENTS & TIMELINES
We follow continuous evaluation and therefore, the following schedules have been
drawn. Students are expected to go through the dates / sessions mentioned and prepare
accordingly. Components marks are subject to change keeping in mind online mode of
teaching.
Component Compo Expected slot / due date Weightage (%)

T
nent
Numbe

O
N E
Class Participation Evaluation
Class Participation Evaluation
Test-1 Objective test (MCQs)
r
1
2
1
Session 17
Session 33
Session 11
5
5
15

O R
Test-2 Written test 2 Session 22 20
Project Interim report 3 Session 15  

D A
Project/Seminar submission 3 By Session 30  
Project presentation+ Consistent   By Session 33 10+5=15

H
performance
End term examination At the end of the semester 40
  Total 100
SUBHENDU DUTTA
MY EXPECTATIONS FROM YOU
 Report to your sessions on time.

 Be ready to respond whenever you are asked a question.

 Read the Case Study / material well prior to the class discussion.

T
 Participate actively and contribute to individual and group learning. Evaluation is based on active
participation.

O
 Evaluation is a continuous process at IBS, so you need to be aware of the timelines.

N E
 In group assignments such as group project, your contribution is very important. This enhances
group effectiveness and also makes you learn how to behave in a group task.

O
D A R
 Maintain the class ambience and avoid distractions to learn from your peers and the faculty
member.
 Join scheduled consultation hour, whenever needed to clarify doubts if any.

SUBHENDU DUTTA
H
 Attendance is compulsory in all sessions.
SESSION GUIDELINES
Each session is divided into the following parts:
 Revision of the previous session with your active participation

 Discussion of the current topic/concepts

O T
 Summary of the topics discussed

 Practice Tests

N E
 Application of economics in everyday life

O
D A R
SUBHENDU DUTTA
H
SESSION 1  After attending this session, you will be able to understand:

INTRODUCTION  What economics is all about ?

 the scope and importance of microeconomics
 why scarcity is the fundamental economic fact of every society ?
 models and methods used in economics
 the scope of managerial economics and how it is interlinked with other disciplines such as business
strategy, marketing etc.

T
 how key economic concepts are linked with day to day managerial decisions.

O
 partial and general equilibrium concepts

N E
 Key Terms

O
 Microeconomics and Macroeconomics

D A R
• Inductive and deductive methods
• Wants, Scarcity, Choice, concept of Margin, Opportunity cost, and efficiency

H
 Positive and normative economics
 Free goods and economic goods
 Partial equilibrium and general equilibrium
SUBHENDU DUTTA
SCARCITY AND CHOICE
• Human wants refer to all the goods, services, and conditions
of life that individuals desire.
• Economic resources are the inputs, the factors, or the means
of producing the goods and services we want. These are
limited and have alternative uses.

T
• We can’t get everything we want, so we need to make choices.
• A fundamental fact that dominates our lives is Scarcity

O
N EScarcity is a situation when goods or services are in short supply

O R
in relation to demand

D A
SUBHENDU DUTTA
H
SCARCITY AND CHOICE

The
The six
six key
key ideas:
ideas:

• Scarcity give rises to choices. ■

■ People
People make
make
■
■AA choice
choice is
is aa rational
rational choices by
choices by
tradeoff.
tradeoff. comparing benefits
comparing benefits

T
• Choices must somehow be made consistent with the and
and costs.
costs.
choices of others. For eg, If you choose to buy a laptop,

O
someone else must choose to sell it. ■
■ Benefit
Benefit is
is what
what ■
■ Cost
Cost is
is what
what you
you
you
you gain
gain from

N E
from must
must give
give up
up to
to get
get
• Incentives reconcile choices. An incentive is a reward that something.
something. something.
something.
encourages an action or a penalty that discourages one. For

O R
eg, Prices act as incentives. If the price of a laptop is too ■
■ Most
Most choices
choices are
are ■
high, more will be offered for sale than people want to buy. ■ Choices
Choices respond
respond

D A
“how-much” choices
“how-much” choices to
to incentives.
incentives.
made
made at
at the
the margin.
margin.

SUBHENDU DUTTA
H
 • Because of scarcity, all economic activities give rise to some
CHOICES ARE MADE AT THE benefits but also involve some costs.
• The aim of economic decisions is to maximize net benefits.
‘MARGIN’
• Net benefits increase as long as the marginal or extra benefit
from an action exceeds the marginal or extra cost resulting
from the action.
Example: Marginal Analysis in TV Advertising (source: • Net benefits are maximized when the marginal benefit is
Salvatore) equal to the marginal cost

T
• Table 1.1 shows a firm’s total and marginal benefits and
costs of increasing the number of TV spots per week.

O
With each additional TV spot, the firm’s total benefits

N E
(sales or revenues) increase, but the extra or marginal
benefit declines.
• The reason is that each additional TV spot reaches

O
D A R
fewer and fewer additional people and becomes less
effective in inducing more consumers to buy the
product.

SUBHENDU DUTTA
H
 • Microeconomics describes the trade-offs that consumers,
workers, and firms face, and shows how these trade-offs are
best made.
TRADE-OFFS
• CONSUMERS have limited incomes, which they spent on a
wide variety of goods and services, or save for the future.
• They maximize their well-being by trading off the purchase
of more of some goods for the purchase of less of others,

T
• All of these trade-offs are based on the based on their preferences,
PRICES faced by consumers, workers, or
firms.

O
N E
• Prices are determined by the interactions of
consumers, workers, and firms in markets…
ANY OTHER WAYS OF price determination?
• WORKERS also face constraints and make trade-offs. First,
they decide whether and when to enter the workforce.
Second, they face trade-offs in their choice of employment.
Finally, they trade-off labor for leisure.

O R
• MARKET is a collections of buyers and
• FIRMS also face limits in terms of the kinds of products that

D A
sellers that together determine the price of a
they can produce, and the resources available to produce
good.
them.

H
• TATA Motors, for example, is good at producing cars and
trucks, but it does not have the ability to produce airplanes,
or pharmaceuticals.
SUBHENDU DUTTA
WHAT ECONOMICS IS ALL ABOUT?

Economics is economising of
resources

Economics is the social

science that studies the

O T
choices that individuals,
businesses, governments,

N E
and entire societies make
as they cope with

O
scarcity and the

D A R
incentives that influence
and reconcile those

H
choices.

SUBHENDU DUTTA
BRANCHES OF ECONOMICS
examples of microeconomic questions are:
Microeconomics……. • Why is the price of mobile phones
produced by Apple are so high ?
….Studies Individual entities. • How does TATA Motors design its SUVs?
• How would a tax on e-commerce affect
the study of how households and firms make decisions and Flipkart?

T
how they interact in markets • Microeconomics variables are: price of a
• Microeconomics deals with the behavior of individual product, company’s income,

O
economic units. unemployment in the car industry etc

N E
• These units include consumers, workers, investors, owners
of land, business firms—in fact, any individual or entity that examples of macroeconomic questions are:
• Why is the unemployment rate so high?
plays a role in the functioning of our economy.

O R
• Can the Reserve Bank of India make our
Macroeconomics…… economy expand by cutting interest rates?
….Studies aggregates
D A • Macroeconomics variables are: price
level in an economy, national income,

H
unemployment etc
the study of economywide phenomena, including inflation,
unemployment,
SUBHENDU DUTTA and economic growth
 Economics is both a social science and a toolkit for
advising on policy decisions.
SCOPE OF ECONOMICS • As social scientists, economists seek to discover how the
economic world works.
• In pursuit of this goal, economists distinguish between
positive and normative statements.
• A positive statement is about what is. It says what is currently

O T believed about the way the world operates. A positive

statement might be right or wrong, but we can test it by
checking it against the facts.

N E
• “The earth is warming due to deforestation”- is a positive
statement. We can test whether it is right or wrong

decisions. O
D A R
Economics is a toolkit for advising governments
and businesses and for making personal
• Normative Statements is about what ought to be. It depends
on values and cannot be tested.
• Policy goals are normative statements. For example, “We

H
ought to cut our use of petrol by 40 percent” is a normative
policy statement.
SUBHENDU DUTTA
 Economics is concerned with the explanations of observed
MODELS & METHODS IN phenomena.

ECONOMICS For example:

• Why do firms tend to hire or lay off workers when the prices
of their raw materials change?
• How many workers are likely to be hired or laid off by a
firm or an industry if the price of raw materials increases by,

O T
say, 20 percent?

Explanation and prediction are based on theories.

N E
• Theories are developed to explain observed phenomena in

O
terms of a set of basic rules and assumptions.

R
• For example, theory of the firm which is based on profit

D A
maximisation

H
theories can be used to construct models from which
quantitative predictions can be made.
SUBHENDU DUTTA
 Economists create and test economic models.
MODELS & METHODS IN • An economic model is a description of some aspect of the
ECONOMICS economic world that includes only those features that are
needed for the purpose at hand.
• It consists of statements about economic behavior that can be
expressed as equations or as curves in a graph.
The Scientific Methods: Observation,
For example, an economic model of a Reliance Jio network

T
Theory, test and More Observation
might include features such as the prices of calls, the number of
• Economists make assumptions
Jio users, and the volume of calls etc.

O
which can simplify the complex
world and make it easier to

N E
A model is tested by comparing its predictions with the facts.
understand.
• To test a model, economists look for natural experiments;

O
Methods: Inductive and deductive

R
conduct statistical investigations to find correlations; and
perform economic experiments by putting people in

D A decision-making situations and varying the influence of one

factor at a time to discover how they respond.

SUBHENDU DUTTA
H
MANAGERIAL ECONOMICS & HOW IT HELPS TAKING BUSINESS DECISIONS

O T
N E
O
D A R
SUBHENDU DUTTA
H
HOW ECONOMICS HELP • To understand this we take an example of a car manufacturer.
BUSINESS MANAGERS ?
the design and efficient production of a car involves not only engineering, but
a lot of economics as well.

• First, a car manufacturer has to think carefully about how the public
would react to the design and performance of the product.

T
• How strong would demand be initially, and how fast would it grow?
• How would demand depend on the prices that the company charged?

O
• Understanding consumer preferences and trade-offs and predicting

N E
demand and its responsiveness to price are essential to the company.
• How high would production costs be?
• And to maximize profits, how many of these cars should the company

O R
plan to produce each year?
• Moreover, what would be the level of competition in the market.

D A
SUBHENDU DUTTA
H
PROBLEM 1

https://forms.gle/e8W7RLKnoZanVogZ9

O T
N E
O
D A R
SUBHENDU DUTTA
H
CHECK YOUR LEARNINGS

• List some examples of the scarcity that you face.

• Explain the idea of a tradeoff and think of three tradeoffs
that you have made today.
• Explain what economists mean by rational choice and think
of three choices that you’ve made today that are rational.

O T
• Explain what it means to choose at the margin and illustrate
with three choices at the margin that you have made today.
• Explain why choices respond to incentives and think of three

N E
incentives to which you have responded today.

O
D A R
SUBHENDU DUTTA
H
KEY CONCEPTS LEARNT

• Microeconomics and Macroeconomics

T
• Positive and normative economics
• Scarcity, Choice, Opportunity cost, and efficiency
•
• O
Free goods and economic goods

N E
Partial equilibrium and general equilibrium

O
D A R
SUBHENDU DUTTA
H
 Key Points
 All economic questions arise from scarcity—from the fact that wants exceed the resources
SUMMARY available to satisfy them.
 Economics studies the choices that people make as they cope with scarcity.
 Choices must somehow be made consistent with the choices of others.
 Incentives reconcile choices.

T
 Choices respond to incentives.

O
 The subject divides into microeconomics and macroeconomics.

N E
 Every choice is a tradeoff—exchanging more of something for less of something else.
 People make rational choices by comparing benefit and cost.

O R
 Opportunity cost is what you must give up to get something.

D A
 Efficiency is achieved when the available resources are used to produce goods and services at the
lowest possible cost and in the quantities that give the greatest possible value or benefit.

H
 Economists distinguish between positive statements— what is—and normative statements— what
ought to be.
 To explain the economic world, economists create and test economic models.
SUBHENDU DUTTA
PRACTICE TEST 1
https://forms.gle/UWK3vv9JsnsZ2TC39

O T
N E
O
D A R
SUBHENDU DUTTA
H
REFERENCES

Microeconomics (2012), 10th edition, M. Parkin, Pearson

Microeconomics ()7th edition, Pindyck, Rubinfeld & Mehta

O T
N E
O
D A R
SUBHENDU DUTTA
H